In today’s world of expense and need for financial assistance, borrowing of loan has become a common practice. In this cycle of borrowing money from banks and repaying the borrowed sum, borrower and guarantor play a significant role. We must understand the liabilities of both parties. Before that, we must get clarity about the concepts of borrower and guarantor.
BORROWER
In simple words, we can define borrower as an individual who obtains money from the opposite party with a legal contract to repay the borrowed sum with the stated interest. The money is borrowed for a specified period. It is essential for the borrower to understand all the terms and condition stated in the agreement. Borrower’s liability is absolute and unconditional, and the loan agreement shall continue until the entire amount with the promised interest is paid. The borrower is known as principal debtor.
GUARANTOR
A guarantor is referred to a person who guarantees to pay the debt of the borrower in case of his incapability to fulfill the obligation. A guarantor is also regarded as surety. The guarantor guarantees the payment of the loan and has no claim over the asset or service purchased by the borrower. Usually, the guarantor is either the part of the family, close relative or friend. The guarantor has a primary responsibility to repay the money borrowed.
According to sec 128 of the Indian Contract Act, 1872 the liability of the surety is co-extensive with that of the principal debtor unless the contract otherwise provides it. Therefore when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/surety even without exhausting the remedies against the principal debtor. As such, where a banker has claimed the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case, the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter’’.
This section clearly shows that if the borrower is unable to pay the debt, the burden to pay back the loan amount lies on the shoulder of the guarantor and it may also affect the credit score of the guarantor if he is unable to repay the loan.
SARFAESI ACT, 2002
Securitization and reconstruction of financial assets and enforcement of security interest Act of 2002 deals with the registration of Asset Reconstruction Companies by the RBI. It supports the financial institution to auction the properties of the defaulter of the loan without the intervention of the court. Under this Act, financial institutions have various rights under sec 13 of the SARFAESI Act. It rectifies as well as identifies the problem related to Non-Performing Assets. Securitization, asset reconstruction, security enforcement without the court’s intervention are the three different processes to recover the non-performing assets. It helps in the rapid recovery of the NPA. If any default is made, the bank can seize the securities except the agricultural land without any intervention from the bank. If the asset is unsecured, the bank has to move to the court and file a civil case against the defaulter. In case of any default, the bank can give written notice to the defaulter to clear its dept within 60 days. If the borrower is unable to comply with the notice the bank can take the property security, sell off the property or appoint any person to handle the case. It also states few rights of the borrowers. If the borrowers at any time before the auction can remit the dues and save his security if any authorized officer acts illegally, he will be penalized, and the borrower will be entitled to compensation if any grievances the borrower can approach DRT and after that DRAT before 45 and 35 days respectively.
INSOLVENCY AND BANKRUPTCY CODE, 2016
The Insolvency and bankruptcy code, 2016 is the laws in India which aim to merge the existing laws by creating a single law for bankruptcy and insolvency. It was introduced in Lok Sabha in 2015, but it was passed in 2016. IBC has brought a standard shift in the recovery process by introducing the concept of ‘creditor in control' instead of ‘debtor in possession.' It is used for the recovery of bad debts by the banking sector or for safeguarding the Continue Read
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